Exclusive: Telefonica gets time to loosen grip in Brazil

By Julien Toyer MADRID (Reuters) - Telefonica has been given 18 months to loosen its grip on the Brazilian mobile phone market, sources said, time which may help the Spanish group ward off an investor rebellion against its strategy. Brazil's antitrust watchdog this month told Telefonica to either sell its interest in TIM Participacoes, the local wireless unit of Telecom Italia, or seek a new partner for its market-leading Vivo mobile business. The regulator, Cade, did not say at the time how long Telefonica had to comply. The 18-month timeframe means Telefonica can pursue its preferred option - a sale of TIM by Telecom Italia between mid-2014 and mid-2015 - and will strengthen its hand against rebel Telecom Italia shareholders who oppose the plan. Telefonica partly owns TIM via its 15 percent stake in Telecom Italia and is at odds with other investors over how to revive the debt-laden Italian firm, one of the country's largest employers. One investor, Marco Fossati, is pushing for the removal of Telecom Italia's board at a meeting on Friday. A sale of TIM - Brazil's second-largest mobile operator by customers valued at $11 billion - would also help Telefonica recoup part of its loss-making investment in Telecom Italia. Telefonica's goal is to break up TIM and divide its assets and network between itself and the other two mobile operators in Brazil, America Movil, and Oi, say sources familiar with Telefonica's plans. Three sources familiar with the matter said Cade had given Telefonica 18 months to comply with its ruling. "That's the time Cade has given Telefonica to comply and, if I had to bet on something, I would expect them to wait until the first half of 2015 to move on TIM," said one senior banker with knowledge of the confidential elements of the ruling. Telefonica declined to comment. Telecom Italia, Tim and Cade did not return calls for comment. REBELLION Cade's timetable will also allow Telefonica to gauge the political mood in Brazil after presidential elections due next October. Any decision to reduce the number of mobile operators to three from four in the eventuality that TIM is sold and broken up would be politically sensitive because it carries the risk of higher prices for consumers. Brazil's government said on Tuesday it would only decide on the fate of TIM after Telecom Italia shareholders resolve their dispute with Telefonica. Fossati, who owns just above 5 percent of Telecom Italia, argues that selling TIM would damage the parent business already suffering from years of sluggish growth and 28 billion euros ($38 billion) of debt. He wants to remove Telecom Italia's board, which he says is betraying the interests of all shareholders, under pressure from Telefonica. It remains unclear how giant U.S. investor BlackRock, which recently increased its stake to become Telecom Italia's second-biggest shareholder, will vote at the meeting on Friday. Sources with direct knowledge of Telefonica's thinking told Reuters that management saw Vivo as "absolutely strategic" and had no intention of finding a partner as an alternative to selling TIM. The sources also said the Spanish company would not amend plans to progressively take over Telco, an investment vehicle which it owns together with Italian investors Generali, Intesa Sanpaolo and Mediobanca and which controls 22.5 percent of Telecom Italia. ($1 = 0.7271 euros) (Additional reporting by Sophie Sassard in London, Brad Haynes in Sao Paulo and Danilo Masoni in Milan; Editing by Leila Abboud and Erica Billingham)